Blink, and you miss it. The noise of the news cycle regarding the COVID-19 outbreak and related policy responses means strategically significant developments can be easily missed. Distraction and shifting responsibilities to manage exposures to virus vulnerabilities no longer mean analysts and strategists miss important developments if they use platforms such as ours to automate the policy monitoring process.
Consider yesterday (March 3). G7 central bank governors and finance ministers held an unusual crisis meeting, then announced they were taking no new concrete steps. The news cycle had not finished absorbing this news when the Federal Reserve proceeded to announce a unilateral, off-cycle half percentage point decrease in the United States interest rate.
Lost in the shuffle was this strategically significant report regarding the EuroArea economic and financial system. The report holds significant strategic implications regarding public policy priorities in the FinTech sector as well as the monetary union area.
FinTech Sector Data
Using experimental data, the ECB reports that FinTech firms in Europe represent 20% of the global total.
Perhaps more importantly, the FinTech sector in the EuroArea is predominantly an establishment innovation play rather than a disruptive outsider play. The data an infographics released by the ECB illustrate the dominance of traditional financial institutions in the FinTech sector as well as the geographic concentrations of fintech innovation:
These data will form the foundation for FinTech policymaking in Europe over the next two years.
A FinTech sector dominated by regulated financial institutions means many of the policy concerns regarding large scale intermediation occurring outside the regulatory perimeter simply do not exist. A FinTech sector operating under a regulatory umbrella through subsidiaries and joint ventures also means that policymakers will place greater emphasis on corporate governance and regulatory capital issues. Finally, this structure locally will incentivize EuroArea policymakers to press for extensions of the regulatory perimeter in other countries where innovation occurs outside the banking, securities, and insurance sectors. Differences of opinion and priority with the United States are inevitable.
Many will remember the pesky provisions of the Maastricht Treaty that prevent 'fiscal transfers" between and among EuroArea members. The practical implication of this restriction is that the EuroArea cannot issue a common sovereign bond. This leaves the EuroArea as the only major global reserve currency without a common publicly traded benchmark asset. This missing piece of the financial architecture for the Economic and Monetary Union created real roadblocks for quick and efficient resolution of various EuroArea sovereign bond crises illustrated between 2009-2014.
Given the Maastricht Treaty's constraints and the political resistance to a "common sovereign bond" within various EuroArea members, the concept of a common bond has become controversial. The ECB is not, however, giving up easily.
The report issued by the ECB yesterday sees the ECB once again making a strong case promoting the creation of a "common sovereign safe asset." The report also provides two full paragraphs on how to create such an asset while flagging a range of technical regulatory policy adjustments that would be required to support such an asset, including with respect to regulatory capital and external ratings.
The section may conclude meekly ("All in all, a well-designed common sovereign safe asset could be a supportive element for the banking and capital markets unions and could therefore contribute to the deepening of EMU. At the same time, the current debate about different safe asset designs illustrates the challenges in fulfilling all the desirable criteria to the same extent.") but burying these arguments in a data-driven report indicates that policymakers in Frankfurt continue to push this global macro policy agenda.
Last week, the BCMstrategy, Inc. platform began tracking the global economic and financial regulation policy shifts associated with the Coronavirus Update. We have also launched a #coronavirus channel on our open Slack workspace where we will share insights and daily platform data regarding global policy initiatives on this topic.
For more information on how the BCMstrategy Inc. policy monitoring platform can accelerate your ability to identify strategically significant developments please contact us. If you would like to join our free and open Slack channels, we will be glad to send you an invitation if you reach out to us today.